ED Prosecuting Government Agencies: Is There No Limit to Its Powers?

ED (Enforcement Directorate), a specialised financial investigation and law enforcement agency in India, is responsible for combating economic crimes and enforcing key economic laws in India.

The economic laws include: 

• Prevention of Money Laundering Act, 2002 (PMLA)
• Foreign Exchange Management Act, 1999 (FEMA)
• Fugitive Economic Offenders Act, 2018 (FEOA) 

The ED has significant powers, including conducting searches and seizures, summoning individuals for questioning, and making arrests. It plays a crucial role in maintaining financial integrity and deterring economic crimes in India.

However, recently, ED overstepped its authority by directly prosecuting a government agency and violating the country’s federal structure.

The government has paused the investigation by questioning the legitimacy of prosecuting a corporation, instead of individual officials.

In this Weekly, let’s examine the ED’s power to investigate individuals and corporations.

ED’s Investigative Power:

The Enforcement Directorate (ED) can initiate investigations against people associated with other government agencies, including public servants, if they are involved in offences related to money laundering or violations of foreign exchange laws.

• Jurisdiction over “Proceeds of Crime”: The Enforcement Directorate (ED) primarily handles two major laws:
• Prevention of Money Laundering Act (PMLA)
• Foreign Exchange Management Act (FEMA)
• Prevention of Money Laundering Act (PMLA): This law is about stopping “money laundering,” which is the act of making illegally earned money (“proceeds of crime”) look legitimate. The ED investigates these cases. Their goal is to find, temporarily seize, and then permanently take away any property (like money, land, or assets) that was bought or acquired using the “proceeds of crime.”

“Proceeds of crime” simply means any property or money obtained directly or indirectly from criminal activity.

If a government office or its officials are involved in activities that create “proceeds of crime” (as defined by the PMLA), the ED has the power to investigate them.

• Foreign Exchange Management Act (FEMA): This law deals with rules about how money is sent to and from other countries. The ED also makes sure these rules are followed.
• Public Servants under Jurisdiction: The ED’s jurisdiction extends to “any person or any other legal entity who commits a crime.” This explicitly includes public servants if they are involved in money laundering offences.
• Predicate/ Scheduled Offences: Money laundering (washing dirty money) doesn’t happen in a vacuum. It always starts with some original, serious crime that generated the illegal money in the first place. These original crimes are called “scheduled offences” in the PMLA.

Scheduled Offences are a specific list of serious crimes mentioned in the PMLA, like corruption, drug trafficking, cheating, fraud, and many others. These are the “base crimes” from which “proceeds of crime” (dirty money) are generated. Many of these often involve government officials.

ED’s Role: If another investigative agency (like the CBI, the state police, or even the income tax department) registers a case for one of these “scheduled offences,” and it appears that money laundering is involved, then the ED can step in. They don’t need to wait for a separate complaint; they can start their own investigation into the money laundering aspect of that case.

Information Sharing: Section 66 of the PMLA empowers the ED to share information with other government agencies if it believes another law has been contravened. This also implies a reciprocal flow where information from different agencies can lead to ED investigations.

Can ED Prosecute a Corporation?

The Enforcement Directorate (ED) can prosecute a corporation instead of or in addition to individuals under the Prevention of Money Laundering Act (PMLA) in India.

As per section 70 of the PMLA, if a company contravenes the provisions of the PMLA, every person who was in charge of or responsible for the company’s actions/business at the time the contravention was committed, as well as the company itself, shall be deemed guilty. This means both the company as a legal entity and the individuals responsible within it can be prosecuted.

The definition of “person” under Section 2(1)(s) of the PMLA is broad and includes a “company” (which further includes any corporate body, firm, or association of individuals). This ensures that legal entities are well within the Act’s ambit.

The ED can provisionally attach and subsequently seek confiscation of properties identified as “proceeds of crime,” even if they are held in the name of a corporation. This is a crucial aspect of PMLA enforcement against companies.

The PMLA recognises a company’s independent liability for money laundering. This means that a corporation can be prosecuted even if the prosecution or conviction of the associated individuals is not yet finalised or is impossible for some reason.

Can ED Prosecute a Government Agency?

The ED’s investigation of a government agency is a debatable topic, as it has the power to investigate individuals within the agency, but the power to prosecute an agency is not explicitly included nor excluded.

Section 2(1)(s) of the PMLA defines “person” broadly to include “a company,” “an association of persons or a body of individuals, whether incorporated or not,” and “every artificial juridical person.” It is argued that government-owned companies or even certain government agencies, if they function as distinct legal entities, could fall under this broad definition.

Section 70 of PMLA applies to “companies” contravening the PMLA. If a government-owned company is deemed a “company” under the Act, this section could technically apply, making the company liable alongside its responsible officers.

These provisions, though, give the ED investigating powers, but the scope of prosecuting a government agency is subject to interpretation, which the Supreme Court did in the present case between the ED and TASMAC.

How ED overstepped its Authority?

Recently, ED overstepped its authority by initiating a money laundering probe based on 41 FIRs registered by the Tamil Nadu Vigilance Department since 2014 against individuals associated with TASMAC (Tamil Nadu State Marketing Corporation)

The allegations include widespread corruption in TASMAC’s functioning, such as:

• Overcharging at liquor shops (collecting Rs 10-30 extra per bottle).
• Kickbacks to TASMAC officials from distillers for securing supply orders.
• Bribery in staff transfers and postings, and manipulation of bar license tenders and transport tenders.

The Tamil Nadu government and TASMAC challenged the ED’s actions, arguing that the central agency was overstepping its jurisdiction and violating the federal governance structure.

When the matter reached the Supreme Court, it stayed the ED’s investigation against TASMAC. It questioned how a criminal offence could be registered against a corporation, suggesting that cases should primarily be against individuals.

The Court also questioned the absence of a clear “predicate offence” (the underlying crime that generates proceeds of crime for money laundering investigation) being directly attributed to the corporation.

The answer to whether the ED has the power to investigate a government agency is not a yes or no; it is subject to Judicial review and interpretation.